Friday, October 31, 2008

PSC Votes to Continue Retail Access Programs Promoting ESCO Service

Over the past decade the New York State Public Service Commission caused well over $100 million to be spent to implement and promote its "retail access" regime. The money aids "competitive" ESCO providers of natural gas and electricity through a combination of direct PSC advertising and promotion expenditures and orders directing the distribution utilities to spend money on the ESCO regime. In contrast, most states rejected the "retail access" model, and California eliminated "retail access" to its residential customers.

In a proceeding commenced to review its "retail access" policies, the Commission issued an Order on October 27 in which it adheres to its retail access regime, with some reduction in public and utility subsidies. Rather than acknowledge a change of direction the Commission essentially proclaimed its mission was accomplished, stating: "We now determine that retail access markets are sufficiently well-established in New York to warrant discontinuance or modification of some retail access policies and practices. Other policies and practices should remain in place to facilitate the further maturation of those markets."

On the same day the same Commission released a companion decision regarding egregious ESCO marketing practices. "ESCOs" are the "retail access" marketers. It is hard to believe that retail access is truly "sufficiently well-established" when it was established through lack of transparency, deception, manipulation and subsidy.

Statistics show that the number of electric customer accounts no longer taking service from the distribution utility grew by 27.7 percent over the past year. For the same period, the number of gas customer accounts taking service from non-utility suppliers rose by 20.6 percent. These figures include all service classes. The "statewide" residential electric customer penetration rate is now 15.6 percent, which represents a 32.5 percent increase in customer migration over a year ago. For gas customers, the "statewide" residential penetration rate is 15.1 percent, a 22.1 percent increase over a year ago. This "statewide" data is somewhat inflated,however, because a considerable segment of New York's customers are spared exposure to PSC and ESCO marketing blitzes because they receive service from LIPA and municipal utilities without "retail access."

How many of the residential customers who switched know if they are saving money, or are they paying more and stuck in a long-term contract with an ESCO? They really can't know because the PSC makes it nearly impossible to compare ESCO bills with what a customer would pay for the same service from the traditional utility. See PSC Makes ESCO Service Comparisons Difficult. And there is no valid study showing that ESCO customers save any money over time due to switching from the utility. See Think Twice Before Switching Utilities. There are many indications that they do worse and can pay far more for ESCO service. See Where Are the PSC's ESCO Marketing Rules?

Continuing its promotion of the ESCO regime, the PSC ruled that "retail access programs" will continue. It also was decided that it is appropriate for utilities to provide information about competitive service to their customers through utility outreach and education programs. In addition, utilities were directed to continue or implement ESCO referral programs and purchase of accounts receivables programs so long as the costs of such programs are not borne by ratepayers. Accordingly, the obligation for funding promotional programs was shifted to the ESCOs, which must assume the financial responsibility of promoting their competitive offerings. PULP has long urged a cessation of subsidies and ratepayer funded promotion of "competitive" ESCOs.

Going forward, then, utilities are authorized, but not required, to continue market match programs, market expos, and energy fairs if ratepayers do not bear the costs of these programs. If utilities choose to continue these programs, at ESCO expense, then utilities are expected to work with the ESCOs on the design and implementation of these programs and to obtain from the ESCOs funding for the programs and approval of the program's content and structure. Continuation or implementation of an utility's ESCO Referral Program, however, was conditioned on ESCO funding for the program, with only those ESCOs that fund the program eligible for participation. Utilities that currently offer ESCO referral programs have recovered their costs in rates paid by their customers, not by ESCOs. Cost responsibility for those utility programs will be transferred to ESCOs as new rates for these utilities are adopted.

Even if the ESCOs offer to take over financial responsibility for the "referral programs," PULP questions whether utilities should participate in them. Typically they offer a tiny savings for two months and hand the customer over to an ESCO at an unknown rate, often significantly higher. The ESCO, however, can truthfully tout that the PSC and the utility are approving the program and that it is a way for customers to "save money" (due to the minimal teaser rate discount) when in fact customers may pay much more over time. The ESCOs thus can continue to hijack the authority of the state utility regulator and the brand of the traditional utility in aid of their deceptive marketing, if the utilities go along.

Two programs in particular were identified by the PSC as being essential and must be continued: utility consolidated billing and the purchase of accounts receivable ("POR") programs. These programs were deemed to be needed to enable ESCOs to bill and/or receive payments from customers on an equal footing with the utility service providers. Customers were also found to benefit from POR programs and consolidated billing because these programs facilitate implementation of the Home Energy Fair Practices Act ("HEFPA") which, among other things, protects customers upon disconnection of service for non-payment, while consolidated billing provides a service that customers prefer because it enables the customer to receive a single bill for distribution and commodity service, thus minimizing customer confusion.

Of course, customers would be protected by HEFPA whether or not the utility did the billing, under the Energy Consumer Protection Act of 2002. Through consolidated billing and POR, ESCOs can hand off to the utility the burden of collection, which may be substantial, considering the problems with high ESCO bills and the inability of ESCOs to collect any amount for their services in court because their charges have not been fixed by the PSC.

Additionally, some utilities had been required to conduct surveys of customers to test their awareness of competitive markets. Once sufficient levels of customer awareness have been achieved, as the Commission believes has occurred, repeating surveys yields little additional information and is of little benefit. Moreover, because the agency collects migration statistics, it can estimate customer awareness of the competitive markets through those statistics. Therefore, utilities were relieved of the obligation to perform these surveys in the future. Similarly, surveys of ESCO satisfaction will no longer be necessary.

While the Commission may believe that retail access has reached a critical mass in New York and that some requirements can be thrown out, problems with ESCOs remain. As the companion order found, enhanced oversight of ESCO marketing is a necessity. With a disproportionate percentage of PSC complaints involving ESCOs, the agency will now consider assessing regulatory fees on ESCOs, something these entities have escaped all these years, and something that is long overdue.

The number of residential ESCO customers may actually go down in the coming years. ESCOs have not demonstrated economic value to residential customers over time and the new marketing rules may reveal that many of the ESCO contracts that purport to save the customer money or fix rates are utter shams. Also, although large customers have switched to ESCO service, the driving force may be a slight tax break on delivery rates due to a loophole which, if eliminated, could reduce large customer switching.

More needs to be done to protect ESCO customers as well, since the marketing order does not go far enough on topics such as early termination fees, full price disclosure, and slamming. As Major League Baseball experienced in the past year when the advent of steroid testing eliminated most of the over 40 sluggers from team lineups, the renewed oversight of ESCOs (as limited as it may be) will likely show that the retail access markets are less robust than they may appear.

So it seems that PSC policy regarding ESCOs is now drifting toward neutrality. PULP suggests that the PSC look at a perhaps unintended consequence of its "retail access" experiment. The Federal Energy Regulatory Commission (FERC), in a decision opposed by consumer groups, held that a utility can buy wholesale energy from its affiliates without federal scrutiny if it has no "captive customers." It then held that customers who have "retail access" are not "captive." This means that the PSC must increase its vigilance to make sure that New York utilities do not purchase electricity or natural gas at high prices from affiliates, taking an unregulated profit at the affiliate level, and then pass that high cost through to customers in little-noticed monthly rate adjustments designed to pass through wholesale costs without profit. Also, the PSC must take further steps to provide more transparent pricing information to facilitate price comparisons between traditional utility service and ESCOs, and among ESCOs.

Lou Manuta

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